As the month is nearing a close, volatility is a key theme in markets in March.
March has seen about twice as many trading sessions in the tails (recording daily moves of at least 1%) compared to the past 20-year average. As advisors look for ways to reduce volatility in client portfolios, the night effect is a compelling solution.
The night effect is a persistent phenomenon whereby overnight markets have historically outperformed the daytime trading session on a risk-adjusted basis. The historically lower volatility of the overnight session may lead to better up/down capture ratios, allowing investors to maintain their target equity exposure more comfortably through periods of market volatility.
Looking at the SPDR S&P 500 ETF Trust (SPY ), nearly 54% of buy-and-hold sessions month to date as of March 17 were in the tails (< -1.00 or >1.00), exceeding the 20-year historical average of 26% of hold sessions in the tails. The day session had 46% tail sessions, compared to 19% on average, and 23% of the night sessions were in the tails compared to 9% historically, according to data from NightShares.
Historically, the day session has had an average of 19%, more left-tail days than right-tail days.
The same volatility is observed in small caps month to date, measured by the iShares Russell 2000 ETF (IWM ).
Between March 1 and March 17, 77% of buy-and-hold sessions of IWM were in the tails, compared to the historical average of 40% of hold sessions in the tails. The day session had 62% tail days, compared to 33% of day sessions historically being in the tails. Nearly 39% of small-cap night sessions were in the tails month to date, compared to 13% historically, according to data from NightShares.
Investors can access the night effect via three ETFs launched last year. The NightShares 500 ETF (NSPY ) offers exposure to the night performance of 500 large-cap U.S. companies, while the NightShares 2000 ETF (NIWM ) provides exposure to the night performance of 2000 small-cap U.S. companies.
The NightShares 500 1x/1.5x ETF (NSPL ) offers exposure to both night and day sessions: providing investment results, before fees and expenses, that correspond to 100% of the performance of a portfolio of 500 large-cap U.S. companies during the day and 150% of the portfolio performance at night. NSPL allows investors to tilt toward the night without omitting day exposure.
For more news, information, and analysis, visit the Night Effect Channel.